(April 18/ 2017)
All Eyes On France
European markets have been closed for the four-day Easter weekend, but as investors return to their desks on Tuesday their focus will firmly be on the first round of the French election taking place this coming Sunday. The first round will likely just narrow the field down to two candidates, who will contest a second round on May 7th. Nevertheless, investors’ sense of risk has been heightened by the four horse race that has emerged. Two of the leading four candidates are viewed as anti-establishment and likely to disrupt markets, partly due to their desire for France to stop using the euro (National Front leader Marie Le Pen is one of these candidates; the other being the “far left” leader).
What Does This Mean?
For the markets: The euro and French bonds are likely to be most affected by the result. If France is governed by a leader that’s viewed as negative for markets, investors are likely to be less willing to own French government bonds. Also, if an anti-establishment candidate wins and pushes for France to leave the euro, it could lead to instability for the currency bloc as a whole.
The bigger picture: The market has got many of the near-term implications of recent votes wrong.
The Brexit vote was supposed to lead to a huge selloff in stocks, particularly in Britain, and a vote for Trump was supposed to do roughly the same thing in America. However, both countries saw their stock markets hit record highs soon after each of those elections. So there is skepticism around the consensus opinion. However, the Brexit vote, as predicted, has been very painful for the pound, so investors didn’t get it all wrong – and something similar could be in store for the euro (or, conversely, a win for one of the “establishment” candidates could buoy French investments and the euro).
Activist Strikes Again
Elliott Management, an “activist” hedge fund, has helped to push out the CEO of a large US company – much to the apparent delight of its shareholders! The company in question, Arconic, was created last year when aluminum giant Alcoa split into two companies. Elliott, which is also trying to force changes at the world’s largest mining company, has argued that Arconic’s costs are too high and the company, essentially, would be much more profitable if it were run by a different CEO.
What Does This Mean?
Investors took the news positively.
The trigger for the CEO’s departure appears to be a letter that he sent to Elliott without the permission of Arconic’s board (the exact details of the letter are unclear at this stage). The company said its CEO’s departure was not explicitly due to Elliott’s pressure. Whatever the reason, perhaps the more important thing is that the deck is now clear for a new CEO to take over and investors appear to like the prospect of that – Arconic’s stock rose more than 5% after the news broke.
The bigger picture: It’s important that the managements of large companies are held to account.
Many large investors are not prepared to shake the boat, either because they are “passive” funds that simply track the broad stock market and therefore take no active role, or because they are just far less inclined to take a public confrontational role. Activist investors often fill this void. Whether the departure of Arconic’s CEO is a positive for Arconic or not remains to be seen, but the process of forcing management to justify their decision-making is typically a healthy one for companies.
RE: Uber Opens Its Hood
“What incentive did Uber have to disclose its financial performance when it is not preparing for an immediate IPO and the private market appears to still be comfortable funding it?”
“Uber didn’t say explicitly why it publicly released some of its financial results, but it may be because its financial results get leaked to the press anyway. By disclosing them itself and having some of its senior executives comment on the results, Uber is better able to control the narrative that surrounds their release. So, for example, Uber can stress that its costs are rising more slowly than its revenues, which should be a good thing, rather than, perhaps, leaked financials that focus primarily on escalating costs and cash burn.”
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Bringing in the Bacon
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